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Business Deductions: Accounting for Small Business

Michael Broida, CPA of Heller, Broida & Eisenberg Accountancy Corp. (www.HBEAC.com), gives tips about business deductions. Learn these hints before you start deducting everything!

  1. A home office must only be an office & used exclusively for business
  2. Capital assets can be deducted immediately or over time
  3. Entertainment expenses can be deducted if they are business related
  4. Wages & salary can be deducted appropriately

Business deductions are what everybody thinks about when they start a business. What can I write off? There’s a basic answer. If it’s ordinary and necessary to the operation of the business, it’s generally deductible. The areas of interest to most people are, “Can I deduct my home office?”

The answer is, it depends. It needs to be used regularly and exclusively for your business. That means that you can’t use your office that’s also your bedroom and deduct it.

Another area is depreciation. If I buy capital equipment or I make major lease hold improvements, how do I deduct that and when? And there are options, in some instances, you can deduct the cost of equipment immediately. In other cases, it’s depreciated over a period of time anywhere from 3 years to 7 years. And in the case of lease hold improvement, 15 years. Again, this is a discussion with your accountant. Everybody wants to go out to the three martini lunch. But it doesn’t exist anymore, with entertainment, again, ordinary and necessary. You cannot take your girlfriend or boyfriend out to dinner and deduct it. However, if you talk about business, and they have expertise, they might be able to deduct it.

Also, you can’t deduct more than 50%. So, that if you take somebody out for dinner and it cost you $200, you only get a $100 deduction.

Compensation, your own in particular. In corporations, compensation becomes very important because the government wants you to be compensated for your services. They don’t want you to have excessive compensation but they do want you to be compensated. The reason for that is, is that they want payroll taxes.

There are grey areas in every deduction. It’s in part up to you to make a decision which is ordinary and necessary and whether it’s worth taking that deduction against the risk of an audit by a taxing authority. Again, these are areas that should be discussed with your tax accountant or tax attorney.